Non-U.S. small-cap stocks lost considerable ground in the third quarter in U.S. dollar terms as the greenback rapidly strengthened against most other currencies. Asian stocks did not decline as much as European shares in dollar terms. Within the broad MSCI Europe, Australasia, and Far East Index, small-cap stocks lagged large-cap shares by a significant amount, while growth stocks held up marginally better than value shares. Health care was the only sector in the index that posted a positive return; materials and energy were the worst-performing sectors. Measured in terms of U.S. dollars, emerging markets fell less than non-U.S. developed markets.
The International Discovery Fund returned −5.22% in the quarter compared with −6.76% for the S&P Global ex-U.S. Small Cap Index and −7.05% for the Lipper International Small/Mid-Cap Growth Funds Average. For the 12 months ended September 30, 2014, the fund returned 7.06% versus 5.40% for the S&P Global ex-U.S. Small Cap Index and 3.77% for the Lipper International Small/Mid-Cap Growth Funds Average. The fund's average annual total returns were 7.06%, 10.96%, and 10.63% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 1.23% as of its fiscal year ended October 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The International Discovery Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The portfolio's largest sector overweights (and two of its largest absolute allocations) were to information technology and consumer discretionary. Within information technology, we continue to like software, Internet, and IT services companies with innovative and durable business models supported by steady bases of recurring revenues or driven by structural trends. In consumer discretionary, we favor European media stocks in particular. We have a large allocation (approximately 20% of the portfolio) to Japan, where we believe that the market is underestimating Prime Minister Shinzo Abe's ability to improve the Japanese economy's frailties and change the entrenched deflationary mindset.
Valuations in sections of the international small-cap market appear somewhat stretched, although they remain within their normal historical average ranges in aggregate. As a result, we believe that stock selection will be essential for outperformance, and we continue to be mindful of risk. While we remain optimistic about the environment for non-U.S. stocks in the intermediate and longer terms, our near-term outlook is more guarded. Political upheaval involving Russia and Ukraine, strife in the Middle East, and civil unrest in Hong Kong all have the potential to roil markets. We expect further monetary stimulus in Europe and Japan as their growth momentum has moderated or stalled.